Treasury losing up to £1.2 billion due to illicit alcohol trade

The Treasury is losing as much as £1.2 billion every year to the illegal alcohol industry. A new report, Drinking in the Shadow Economy, demonstrates how illicit alcohol consumption is becoming a permanent and growing problem due to excessive taxation.

The damaging effects of counterfeit alcohol

Failing to deal with counterfeit and smuggled alcohol threatens not only public cash, but public health and public order. Counterfeit alcohol can contain potentially life threatening levels of dangerous chemicals, whilst alcohol smuggling is linked to other illegal activities such as drug dealing, violence and money-laundering.

High taxes are encouraging the growth of the illicit alcohol market

It is evident that high taxes are causing this boom in the illicit alcohol market. As prices rise, consumers are increasingly turning to the more affordable options available in the shadow economy. Government policy might intend to improve people’s health, but it may be having the opposite effect.

With the number of seizures of counterfeit alcohol rising five times between 2008/09 and 2010/11, and growing reports of counterfeit spirits being sold by both licit and illicit retailers, it is crucial that the government reconsiders its strategy in dealing with alcohol pricing.

High alcohol taxes do not reduce alcohol consumption

Contrary to popular belief, making alcohol more expensive is not an effective way of reducing drinking rates or the problems associated with excessive alcohol consumption. Britain and Finland have some of the highest alcohol taxes in the world and yet the amount of drink consumed in these countries is the same as in places such as France and Spain, where alcohol is more affordable.

Commenting on the report, its author, fellow of the Institute of Economic Affairs Christopher Snowdon, said:

“The government’s focus on maximising tax revenues is short-sighted and dangerous. Aside from losing money by encouraging consumers to find cheaper illicit alternatives, public health and public order are also being put at risk by high prices. Policy-makers ought to take the threat of illicit alcohol production seriously when considering alcohol pricing in the future.”

"There is a clear relationship between the affordability of alcohol and the size of the black market. Politicians might view the illicit trade as a price worth paying for lower rates of alcohol consumption, but this research shows that the amount of drink consumed in high tax countries is exactly the same as in low tax countries."

“Minimum alcohol pricing might seem like a quick fix to tackle problem drinking, but it is likely to cause many more problems by pushing people towards the black market in alcohol."

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.